Reference no: EM133473893
An Investment Decision for Central Med Health System
Central Med Health System (CMHS) was created on January 1, 1996, with the mission of "providing expert healthcare to the people of North Central Iowa." The nonprofit organization comprises two general, acute care hospitals, Central Med Hospital and Shelty Hospital, with a combined total of 395 beds. The service area covers six counties in North Central Iowa: Rich, Crawford, Ashville, Morris, Huron, and Knowell counties. Central Med is the largest provider of healthcare services between the cities of Cletan and Flagship. The health system provides a complete range of primary care and specialty practices. Central Med Hospital offers a Level II trauma center and a Level II perinatal department. Other featured services include cardiac care, comprehensive neurological services, cancer care, behavioral health, maternity services, sports medicine, surgical services, pediatric therapy services, speech therapy services, industrial health and safety services, home care, and hospice care.
All services and business units are driven by the mission, vision, and values of CMHS. Central Med's vision is to provide "expert care close to home." The organization seeks to be the provider of choice for residents of North Central Iowa, and it strives to dissuade residents from traveling to Cletan or Flagship for care. The core values as stated by Central Med include the following:
Quality: We will be known for excellence in all that we do.
Customer service: We will work to fulfill the individual needs of every patient, family member, and visitor.
Innovation: We will continually strive to develop and work with the latest processes and technologies available in every department.
Teamwork: Our staff will work together to provide our patients with the best care possible.
Financial status
CMHS is a financially stable organization. Operating margins have been consistent with similar "BBB" bond-rated organizations over the past three years and currently, stand at 3 percent. A $12 million endowment provides consistent investment returns, which contributed to a total margin of 8 percent last fiscal year. CMHS maintains a prudent balance sheet with a debt-to-capitalization ratio of 25 percent. Days cash on hand has averaged 225 over the last three years, and the current ratio was 2.5 last year, demonstrating the system's ability to cover its operating expenses. CMHS has historically used debt to finance capital projects, but due to the evaporation of liquidity in the municipal bond markets, the system has decided to fund certain projects with cash from operations.
The problem
Like other nonprofit healthcare providers, CMHS struggles to enhance patient care with limited financial and capital resources. Investments in new clinical programs are evaluated carefully to ensure that patients have access to the appropriate new programs and services. CMHS strives to balance the need to invest in the clinical programs that are most important to its patient population with the need to remain financially viable.
CMHS leadership is currently faced with a difficult decision. The system has $13 million to invest in a clinical expansion project, and stakeholders throughout the organization differ in their ideas about which program is most deserving of the new capital investment. Whereas certain members of the leadership team want to invest in an expanded radiation oncology program, others are interested in bolstering heart services by enhancing the interventional cardiology program.
Option 1: Radiation Oncology
The American Cancer Society, the Journal of Oncology Management, the Health Care Advisory Board, and other expert sources project a 20 to 25 percent increase in the number of newly diagnosed cancer cases in the next ten years. In addition to this increase in newly diagnosed cases, the five-year relative survival rate has increased significantly as a result of newer technologies and treatments. As people live longer, the demand for cancer services will grow.
Dr. Moh, the only radiation oncologist at CMHS, sees up to 70 patients a day, which is 40 percent more patients than the average radiation oncologist sees. The facilities are cramped and the schedule is tight, but somehow he can complete the day's work. Perhaps the friendly culture of CMHS keeps the staff content with current operations, but Dr. Moh believes something needs to be done differently to continue to provide high-quality care.
Every radiation oncology department in the country needs two components: a board-certified radiation oncologist and the essential equipment to create a treatment plan. CMHS has both of these components, but many people have become concerned that the department will need additional equipment to accommodate treatment plans. Linear accelerators are traditionally used to program a patient's treatment plan and can be accessed for each appointment. CMHS currently has two machines and averages between 40 and 50 patients per day. The literature recommends that one machine treat 30 to 35 patients per day; thus, to meet demand, CMHS must have two machines running. Technical difficulties are a problem because CMHS's linear accelerators are unmatched. If one machine goes down, the patient plan for that machine cannot be transferred to the other machine. This issue results in wasted time and resources.
In addition, Dr. Moh is concerned that CMHS is vulnerable to competitors who might want to enter the radiation oncology market in CMHS's primary service areas. Such competition would be difficult for CMHS to withstand given its current facilities. Dr. Moh knows he needs to act quickly to secure the future success of the program.
Option 2: Interventional cardiology
Although the cardiology program has been quite successful for CMHS, further investment in the interventional cardiology segment of the department is desperately needed. Current industry trends favor interventional cardiology procedures over traditional open-heart operations, and expert industry organizations predict that these trends will continue. CMHS needs to make a significant investment in its interventional cardiology program if it wants to retain and expand its market share in this specialty.
Cholesterol-lowering and antihypertensive medications introduced over the past ten years have resulted in significantly extended life spans for cardiology patients. However, Americans leading more sedentary lifestyles and eating high fat diets have contributed to a larger number of patients requiring specialized cardiac care. As the number of patients requiring specialized cardiology care continues to increase throughout the service area, CMHS has been struggling to expand its service offerings to this patient population. At the same time, a large competing health system in the area has recently invested in a significant expansion of its cardiovascular service line. Dr. Peale, an interventional cardiologist and CMHS's director of cardiology knows that to ensure the future success of the cardiology division, he needs to secure additional financial support from hospital leadership.
The cardiology program at CMHS has overcome significant challenges in the past. Several years ago, the division faced a need for more cardiac surgeons and operating rooms to handle the increased number of coronary artery bypass graft procedures. The solution to the problem was to remodel the cardiac operating rooms and recruit several highly qualified physicians. The program has since become one of the more profitable units at CMHS and a model that other divisions within the hospital hope to emulate.
Advances in treatment options for cardiology patients have focused on minimally invasive interventional procedures that are more comfortable for patients and have significantly reduced recovery times. The number of minimally invasive interventional cardiology procedures performed at CMHS has nearly doubled in the past few years. These procedures are completed in specially designed treatment areas where sophisticated imaging equipment is used to guide small catheters and instruments through patients' cardiovascular systems. The single interventional cardiology suite at CMHS is no longer adequate to serve this expanding clinical need. Dr. Peak knows that CMHS needs to invest significant capital in the creation of additional interventional cardiology treatment areas if it hopes to retain market share in this competitive environment.
Implications of the investment decision
Given CMHS's location, the health system is continually concerned about its ability to retain market share and avoid losing patients to hospitals in Cletan or Flagship. Although the financial stability and reputation of CMHS are enviable, the hospital has been unwilling to expand beyond the North Central Iowa region. Further, CMHS's clear mission and strong organizational culture have made affiliation options, such as alliances or other cooperative arrangements with competitors, virtually impossible to consider. As a result, any CMHS investment will be pursued on its own.
In previous discussions about investment options, hospital leadership had proposed other possible uses for the $13 million. However, the board has rejected the other alternatives and has narrowed the options to the two currently on the table. In addition, the board is unwilling to further explore avenues that might make the two options jointly possible. Even though an exclusive investment in radiation oncology will threaten the success of the interventional cardiology program, and vice versa, the board wants to force a decision between the two, and it wants the decision made now.
QUESTION 1
What are the pros and cons of each alternative investment? Does the radiation oncology project or the enhanced interventional cardiology program better align with CMHS's mission and vision? Why?
QUESTION 2
Which stakeholders at CMHS will be affected by this decision? Which stakeholders should be included in discussions about which alternative investment to pursue?
QUESTION 3
What additional information would you need to make a solid business decision? Are there nonfinancial data you should consider?
QUESTION 4
What implications would exist for the alternative service that is not selected for investment? What might happen to the volume and market share for that service?
QUESTION 5
If the two alternatives are not mutually exclusive (that is you believe you could still do both projects at the same time), what types of financing or affiliation (e.g. joint venture, sale, merger, etc.) strategies would you propose to permit investment in both options? If you agree with the Board that only one can be done at a time, please explain why you think that is the best choice.